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More Ethics in Business.

Posted on 13th June 2014

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This story, from a few weeks ago, raises an interesting dilemma.

Mark Carney, the new governor of the Bank of England, says that bankers should be more ethical in the way that they do business. This is not a new idea: business leaders in all industries have been asked to be more ethical, more green, and generally more socially responsible many times in recent years.

Whilst I think that this is a very good idea, and a prerequisite for success in many recent drives to make the world a better place (less prone to financial crises and less polluted, and with less tax avoidance), we seem to be forgetting something rather important.

Business leaders are answerable to their shareholders, and to the regulatory arms of stock exchanges and similar bodies. Their answerability is very clear, and very simple: to maximise profit. If they make decisions which do otherwise, they can be fired, fined, and even barred from office.

If we want business leaders (bankers and other executives) to be more ethical, we therefore need to change the rules under which they operate. We need to not only take away the risk of punishment and censure for "doing the right thing", but also to forcefully incentivise being more ethical. Any system of incentives needs to be strong enough to outweigh the loss of income which results from decisions which reduce (or even just defer) profits, remembering that senior executives get very large bonuses based on performance (i.e. the profits and turnover of their companies).

So, Mr. Carney, please devote a little more attention to the changes needed to enable this more ethical approach to business. Without those changes, it is all just wishful thinking.